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Forgiving co-ops' federal coal debt to promote renewables faces hurdles

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Forgiving co-ops' federal coal debt to promote renewables faces hurdles

A proposal by several Democratic presidential hopefuls and environmental groups aimed at helping rural electric cooperatives transition away from coal-fired plants to renewable generation sounds relatively straightforward but, in reality, faces a number of challenges that put the viability of such an option in question.

The Center for American Progress, Center for Rural Affairs, advocacy group Clean Up the River Environment and co-op association We Own It have suggested that Congress could help electric cooperatives transition to a greener generation portfolio by allowing the U.S. Department of Agriculture's Rural Utilities Service, or RUS, to forgive the outstanding debt that cooperatives owe related to coal-fired generation.

As a second step, the groups said Congress could authorize the RUS and the U.S. Department of Energy to offer grants in lieu of tax credits to install renewable power capacity equivalent to that of the retired coal plants and fund related needed grid improvements. One of the proposals would make the debt relief contingent on investing in renewables.

However, the potential impact of the proposal remains unclear, given that several of the co-ops with the most coal-fired generation no longer owe the federal government money. The plan also faces practical hurdles, such as gaining the support needed to change existing tax laws to accommodate the plan.

The cooperative debt forgiveness and grant idea has nevertheless picked up new traction among some Democratic presidential hopefuls, including Sens. Kamala Harris and Elizabeth Warren and businessman Andrew Yang, who included one or both aspects of the proposals in their recent climate change plans.

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Scientists have warned that the world needs to move rapidly to limit heat-trapping emissions by 2030 and to achieve net-zero emissions by 2050 to avoid some of the worst possible impacts of climate change."Accelerating the deployment of clean energy to rural areas will require building off the existing efforts of rural electric cooperatives and leveraging the [RUS] to take over unprofitable dirty energy assets, speeding up their retirement and enabling clean and renewable technologies to replace them, quickly decarbonizing power generation for rural communities while keeping energy costs low," Harris said in her plan.

Electric cooperatives reduced their annual carbon dioxide emissions by 9% from 2009 through 2017 and have invested in 7.5 GW of wind generation and 900 MW of solar generation through ownership or power purchase agreements through 2018, according to a July report by the National Rural Electric Cooperative Association. Co-ops have another 3 GW of wind and solar generation capacity planned.

But while the U.S. power sector, in general, has shifted from a coal-dominant mix to one led by natural gas, coal plants in 2017 accounted for 64.2% of cooperative-owned generation, the report said. The goal of the debt forgiveness and grants proposal is to provide the money cooperatives need to shutter coal plants and help them invest in renewables.

"We need to build a 100% clean energy economy in this country and around the world to prevent the worst outcomes of climate change. That needs to be a system that is equitable, that doesn't leave any Americans behind and that maintains a reliable and affordable electric system in all corners of the country," said Kristina Costa, a former senior fellow at the Center for American Progress.

Questions remain

In addition to the need to convince federal lawmakers to write off potentially billions of dollars in debt in the name of addressing climate change, the proposal faces several additional hurdles, including the need for answers to some crucial questions.

For starters, a number of cooperatives have refinanced their loans with nongovernmental lenders, which would render the idea of RUS debt forgiveness moot for those co-ops. For example, two of the top three cooperative owners of coal-fired generation, the Basin Electric Power Cooperative and Tri-State Generation and Transmission Association Inc., said they no longer owe the RUS money. Other cooperatives that indicated they do not hold RUS debt are Great River Energy, Intermountain Rural Electric Association and Wabash Valley Power Association Inc.

"RUS served us very well for a long time and is still a critical and important resource for a majority of cooperative systems," primarily distribution cooperatives, Great River Energy Vice President and Chief Power Supply Officer Jon Brekke said in an interview. The RUS offers loans to cooperatives for nearly every conceivable energy-related investment, from distributed generation and energy efficiency to transmission lines and power plants.

But the cooperatives that do owe the RUS money have been largely quiet about whether they are even interested in debt forgiveness or accessing federal grant dollars to invest in renewables and related infrastructure. Also, given the low cost of natural gas, whether cooperatives would use their freed-up cash to invest in natural gas-fired plants rather than renewables is also unknown.

For instance, cooperatives Buckeye Power Inc. and East Kentucky Power Cooperative Inc. indicated they owe the RUS debt on coal projects. And Buckeye CEO Patrick O'Loughlin said that almost all of the RUS money the co-op owes for coal plants was to add emissions controls, which "is a constraint on our ability to just switch to another source of fuel or renewables."

While the concept of debt forgiveness sounds inviting, O'Loughlin said the cooperative makes good money selling its coal-fired generation into the wholesale power market of PJM Interconnection. He also said the idea of relying more on renewables without adding new baseload generation raises reliability concerns. Moreover, he said, "if you borrow from the government, it comes with strings attached."

As for grants in lieu of tax credits, O'Loughlin indicated that Congress would first need to change one particular aspect of tax law that could put co-ops in danger of losing their tax-exempt status if they accept federal grants for renewables.

In a 2017 tax bill, Congress held that government grants, including from the RUS, would count as outside revenue for purposes of determining what co-ops or public power entities are tax-exempt. To maintain their tax-exempt status, rural utilities must get at least 85% of their revenue from members, a share that could be harder to achieve if government grants are counted as income. The National Rural Electric Cooperative Association has been lobbying for lawmakers to reverse that rule, and Rep. Terri Sewell, D-Ala., introduced related legislation, H.R. 2147, in April.

Understanding the scope of the issue

The money that cooperatives still owe the federal government for their coal-fired projects is also uncertain. Without this information, the extent to which federal debt forgiveness would allow co-ops to transition to more renewables will remain unclear.

The Center for American Progress and the other groups that have floated the co-op debt forgiveness idea estimated that cooperatives owe the government between $7 billion and $8.4 billion in outstanding debt tied to coal-fired generation, most of which is likely related to financing to install environmental controls. The Center for American Progress suggested that forgiving those loans could cut emissions by at least 44 million tonnes of carbon dioxide equivalent.

An August report by the National Rural Utilities Cooperative Finance Corp., which is also a lender to cooperatives, indicated that as of the end of 2018, cooperatives had a combined $40 billion in long-term debt with the RUS, but the report did not break that total down by fuel type.

In addition, neither the environmental groups nor the RUS has tabulated precisely how much debt cooperatives still owe the federal government related to their coal-fired generation. The RUS told S&P Global Market Intelligence that while the service is capable of coming up with topline coal-specific debt figures, the service declined to do so given the amount of time such an endeavor would involve. However, the scope of the debt could be determined if interest grew in the proposal enough for federal lawmakers to ask the RUS to provide those figures.

Most of the more than three dozen cooperatives that either own coal-fired plants or hold minority shares in coal plants similarly declined to answer or did not respond to inquiries regarding their RUS debt for coal projects.